Traders use stop loss and also trail their stop loss. This is done so that the profit is protected in an open position. A trailing stop loss thus lets you protect your profits and does not make a profitable trade a losing one. This could happen because of a sudden movement in the stock price against your direction.
A trailing stop loss is also a great way to stay detached from the trade. This will let you not be emotionally attached to the trade.
What is a trailing stop loss order?
A trailing stop loss is like a stop loss order. The stop-loss order, however, would be fixed for a trade and the trailing stop loss will keep moving. The initial step would be placing a stop loss and you would be trailing this stop-loss ahead when the price starts to move in your direction.
Make sure that you understand that the trailing stop loss has to be applied only when the trade moves in your direction. If the trade starts to move in the opposite direction then you should get out of the trade at the set stop loss, you cannot adjust this stop-loss and increase it to stay in a losing trade for long.
The trailing stop loss is very flexible and it lets the trader protects his profits. This reduces his risk.
What are the similarity and the difference between stop loss and trailing stop loss?
A stop basically means that the trader is telling the broker that he needs to minimize his risk. The stop loss is fixed but the trailing stop loss is flexible and can be moved. This is as per how the price of the stock is moving. This lets the trader hold on to his positions for long and ride the trend without the fear of getting stopped out.
The trailing stop loss will be adjusted to minimize the loss and protect the profit.
Benefits of using trailing stop loss
One of the major benefits of using a trailing stop loss is that it lets you specify how much you are willing to lose. This also does not limit your profits. You can trail the stop loss on an asset that you are trading in. This could be stocks, commodity, options and even futures.
How should you use the trailing stop loss order?
You should take care that you do not place the stop loss close to where your current price is. If you place the trailing stop loss very close then the price may just hit and start moving upwards again.
The trailing stop loss should be placed in such a place that the price does not touch it till the market has shifted its course of movement.